Following the changes made in 2016 of the 3% Stamp Duty Land Tax surcharges for people buying second homes and buy to let properties, followed by the introduction from 6 April 2017 of a limit to tax relief available to mortgage interest on letting residential property, the landlords are not considering themselves in a very favorable position.
The changes in SDLT can be very disturbing for the property portfolios with high borrowings and some landlords with high borrowing could end up paying income tax on loss making rental properties.
We came across a lot of clients recently who want some restructuring of their property portfolios.
We believe that the restructuring should be done on sound commercial basis rather than on an artificial arrangement that HMRC can overturn using Anti- abuse rule. We believe in making commercial decisions such that they will reflect the underlying reality of the tax payers’ position.
So If a landlord transfers the equitable interest in a property portfolio to a limited company while retaining the legal ownership so as not to disturb the existing borrowing. It might look like an arrangement with no commercial basis and it might distort the taxpayer’s position.
In one of our previous articles we discussed the benefits of letting the property through a company. Although there are benefits of transferring properties into limited companies but it triggers capital gains tax and SDLT. With the 3% surcharge there appears to be a significant barrier to incorporation of a property business. This can be avoided if the property business that are run as a partnership.
To have a proper property partnership incorporation the partnership should be registered with the HMRC, should have a written partnership agreement and should have a separate bank account.
This means that you will need to move your properties into a partnership with two or more people before setting up a limited company. As with CGT relief, the property activities must be providing the majority of your income and be deemed a business as mentioned above.
Luckily, a husband and wife count as two partners.
If a property partnership incorporation exists, i.e. the partnership is registered with HMRC, has a written partnership agreement, separate bank account etc, or the properties are within a Limited Liability Partnership (LLP), relief of up to 100% of the SDLT charge is available. Broadly, full relief from SDLT is given as long as the ownership of the new company matches the original partnership shares.
This means that a genuine property partnership incorporation can be made with no immediate charge to tax and prevent the changes to the taxation of buy-to-let properties from making a significant impact, whilst enjoying the benefits of a limited company.
If you have a genuine property partnership incorporation, it could be a tax efficient way and sensible way of restructuring.
So if your income is most significant to you and your spouse then you can incorporate your business without incurring huge tax bills:
To benefit from CGT and SDLT all you need to do is following:
- Create a partnership between you and your spouse through HMRC
- Submit your self-assessments in the most tax-efficient way
- After two to three years set up a limited company with the support of a lawyer to incorporate your properties into the limited company
You will no longer need to submit self-assessment for your properties, but you will need to submit annual accounts and corporation tax returns for your company. Please note that you will be still required to complete self-assessment as you will be the director of the business.
For more information on tax planning and taxes associated with the restructuring. Contact Taxaccolega at : 02081 270 728